Zero coupon bond questioon


L

lucky

Hello,

If anyone can help me I would appreciates it. Recently the retirement guy
( Ed Jones ) in response to my request to get 6 year CD came back with a 16
year zero coupon bond.problem is that I had $10000 debited from my account,
BUT and it instantly became worth $8400. What is going on here?

lucky?
 
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R

Rich Carreiro

lucky said:
If anyone can help me I would appreciates it. Recently the retirement guy
( Ed Jones ) in response to my request to get 6 year CD came back with a 16
year zero coupon bond.problem is that I had $10000 debited from my account,
BUT and it instantly became worth $8400. What is going on here?
Are you sure the cash in your account was drawn down by $10,000
and you're not just confused by the fact that a zero with a face
value of $10,000 is currently worth $8,400? Double-check your
account statement and/or trade confirmation.

As for the actual investment, a couple of notes...
(1) Assuming the zero is $10,000 of face value, paying
$8,400 for it works out to an annual yield
of 1.1% That is TERRIBLE. You can easily beat
that with even a short-term CD. Is this a
municipal zero coupon bond? Is the zero
being held in a retirement account (like
an IRA) or in a normal taxable account?
(2) Unless you're really sure you're going to hold
it to maturity, a zero is generally a horrible
investment to hold with interest rates at historic
lows. A 16-year zero will lose roughly 16% of its
value for every 1% rise in interest rates. Ouch!
You really might want to consider ditching it
pretty soon and moving to something else.

But before that, come back to us with the answers
to the questions above. Good luck!
 
E

EClaudius

Right now, a zero coupon bond would be my last choice of investment. The
rate of return is likely to be extremly low and with the liklihood of the
fed raising the discount rate in the next few years, you can kiss your
principal goodbye. If you want to be safe, put your money in something like
RRPIX which will go up when interest rates go up.
 
L

lucky

Hi thanks for help,

this is really driving me nuts.
I was trying to use simple numbers. I had asked for 5-7 year CDs.

Actually there are 2 Zero Coupons.The rep always talked about what they
would be at maturity.

1..The first amount debited from the account was $12,500 on 6/25/2003. This
Zero coupon matures on 1/21/2019 at $25000. The value dropped immediately
to $10,187. On the Ed Jones sheets it does not mention interest rate
although the representative said it was 0.0454 which would take $12,500 to
$25000 in that period

2.The second amount debited from the account was $25,000 on 6/25/2003. This
Zero coupon matures on 5/1/2015 at $42000. The value dropped immediately
to $20,656. On the Ed Jones sheets it does not mention interest rate
although the representative said it was 0.0445 which would take $25000 to
$42000 in that period.


Seems to me that 0.058% would be the interest to take $10, 187 to $25000.
Seems to me that 0.061% would be the interest to take $20,656 to $42000.

How can this be.

Very confused. Please help!

Not so

lucky
 
R

Rich Carreiro

lucky said:
this is really driving me nuts.
I was trying to use simple numbers. I had asked for 5-7 year CDs.
Then I would be very angry that I was pushed into 12 or 16 year zeros.
As I mentioned before (as did someone else), I believe long-term zeros
are a HORRIBLE investment in the current interest rate mileau. A
12-year zero will lose 12% of its value for every percentage point
increase in interest rates and a 16-year zero will lose 16% of its
value for every percentage point increase in interest rates. I would
question your rep very hard about why he did what he did and I would
strongly think about selling these things and putting your money into
other investments (and quite possibly taking your money to another
broker). Though I suppose I'd wait until I found out exactly what the
17% drop in value immediately after purchase was all about.

BTW, who is the issuer of the zero?
Actually there are 2 Zero Coupons.The rep always talked about what they
would be at maturity.

1..The first amount debited from the account was $12,500 on 6/25/2003. This
Zero coupon matures on 1/21/2019 at $25000. The value dropped immediately
to $10,187. On the Ed Jones sheets it does not mention interest rate
although the representative said it was 0.0454 which would take $12,500 to
$25000 in that period
I can't think of what could cause that $2,317 (18.5%) gap. Have you
asked the broker/brokerage? What did they say? The only thing I can
think of would be the bid/ask spread plus your broker's mark-up. But
an 18.5% combined spread and markup?

In any case, growing from $12,500 to $25,000 in 15.5 years does indeed
give an interest rate of 4.57%.

By contrast, with some searching you can find a 5-year CD which yields
around 4.00%. With such an instrument you'd only have your money
locked up for 5 years and have no risk of principal loss.
2.The second amount debited from the account was $25,000 on 6/25/2003. This
Zero coupon matures on 5/1/2015 at $42000. The value dropped immediately
to $20,656. On the Ed Jones sheets it does not mention interest rate
although the representative said it was 0.0445 which would take $25000 to
$42000 in that period.
Again, I have no explanation for the $4,444 (17%) gap unless it is the
combined spread and markup.
Seems to me that 0.058% would be the interest to take $10, 187 to $25000.
Seems to me that 0.061% would be the interest to take $20,656 to $42000.
That's basically correct -- however, you paid $12,500 for the first
bond, not $10,187 and you paid $25,000 for the second one, not
$20,656. So 4.54% and 4.45% are the proper interest rates to
consider since that will be the return on the money you actually
put up to purchase these things.
How can this be.
As I said, my guess is that the approximately 18% difference in both
cases represents the combination of the effects of the bid/ask spread
on the bonds (many bonds are very thinly traded, which is one of the
reasons I ask about who the issuer is) and your broker's mark-up.
Have you asked them about the gap? What did they say? I further
believe the spread+markup is the case because the broker quoted you a
yield based on the $12,500 or $25,000 figures -- i.e. what you
actually did pay for the bonds.
 
D

Doug

I dunno. Problem is, it's so confusing that you can't figure it out.
Which probably hides the brokers (high) commissions. COSTS MATTER!!
You can buy individual bonds online at Etrade and others for very
small commissions. You can buy low cost bond funds at Vanguard and
others. Why don't you use those and ditch your high cost, uneeded
broker? The next thing he will do is want you to sell them before
maturity (so he can get ANOTHER commission). If you don't employ him,
you wont have to pay him. Sorry to be so blunt, but if you are smart
enough to post your question online, you are smart enough to buy bonds
online.

I had a Merrill Lynch account at one time, and they used to pull the
same stuff with me. Then I wised up. I now use Etrade and Vanguard.
 
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C

Caroline

Rich Carreiro said:
Then I would be very angry that I was pushed into 12 or 16 year zeros.
I really hope there's more to this story, like the poster somehow gave the
Edward Jones broker more legal authority than has so far been explicitly
indicated.

Barring this, if I were lucky I would check my legal standing. If I had legal
standing, I would demand Edward Jones restore my account to its condition prior
to the purchase of these 12 and 16-year zero coupons, only because the
difference in maturity makes a huge difference in the prospects of this
investment. If E Jones is uncooperative, I would start threatening legal action
according to the legal standing I had.

It's hard to believe this happened and is legal. Lucky, do post more details
after you've talked with E. Jones.
As I mentioned before (as did someone else), I believe long-term zeros
are a HORRIBLE investment in the current interest rate mileau.
Just to remind others, and as Rich noted the first time he said this, the
exception would be if one planned to hold the long-term zero to maturity.
A
12-year zero will lose 12% of its value for every percentage point
increase in interest rates and a 16-year zero will lose 16% of its
value for every percentage point increase in interest rates.
This is all a crapshoot, but just from where I'm sitting, interest rates may
stay flat for five years. Having a relatively high yield long-term bond during
those five years (as opposed to a low yield one-year CD, say) is going to
substantially reduce the loss cited above.

snip
BTW, who is the issuer of the zero?
I too would like to know this.
 

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